Last updated on December 17, 2018
IRS Limits Personal Deductions
In Notice 2018-42, issued on May 25, 2018, the IRS modified Notice 2018-03, which provided the optional 2018 standard mileage rates for taxpayers to use in computing the deductible costs of operating an automobile for business purposes.
Notice 2018-03, in December 2017, identified a standard mileage rate for 2018 of 54.5 cents per mile for all miles of business use (business standard mileage rate) that taxpayers were to use, including to deduct unreimbursed employee travel expenses as a miscellaneous itemized deduction under Section 67 of the tax code.
Notice 2018-42 modifies Notice 2018-03 in light of the Tax Cuts and Jobs Act, signed into law in December 2017. Because the tax legislation suspended the miscellaneous itemized deduction under Section 67 for unreimbursed employee business expenses from 2018 to 2025, the notice explains that the standard mileage rate will not apply to those expenses during that period.
As a May 2018 post from law firm Nexen Pruet explained:
In the past, employees who were not reimbursed for business mileage-related expenses could deduct those expenses from taxable net income. The unreimbursed mileage deduction was allowed along with other "unreimbursed work-related expenses" where all unreimbursed work related expenses in excess of 2 percent of gross income would be deductible. Outside sales employees, for example, who logged significant mileage on their vehicles but did not get reimbursed by their employer could potentially get a deduction for those mileage expenses on their personal taxes. However, the Tax Cuts and Jobs Act in effect for the 2018 tax year eliminated many itemized deductions, including unreimbursed employee business expenses.
Employees affected by this tax change may approach employers about this potential impact on their bottom line and push for a new or revised reimbursement policy to recoup these "tax losses."
Employers often reimburse workers for using their own vehicles to meet with clients, attend professional events, make deliveries or fulfill other duties. Tracking, processing and reimbursing accurately for these costs is not always easy, though, particularly for companies with many mobile workers.
Common ways to "make employees whole" for their business-driving expenses are:
- Flat car allowance. Employers provide employees a flat car allowance, such as $400 per month, to cover the cost of fuel, wear and tear, tires and more.
- FAVR programs. Employers reimburse employees under a fixed and variable rate (FAVR) reimbursement program, in which employees are reimbursed for fixed costs (such as insurance, taxes and registration fees) and variable vehicle expenses (such as fuel and maintenance). The reimbursements are tax-free to employees if certain expense-accounting requirements are met.
In 2018, for computing the tax-exempted allowance under a FAVR plan, the IRS announced earlier this year that standard automobile costs may not exceed $27,300 for vehicles excluding trucks and vans or $31,000 for trucks and vans.
On Dec. 14, the IRS announced in Notice 2019-02 that for computing allowances under a FAVR plan, standard automobile costs in 2019 may not exceed $50,400 for automobiles, trucks and vans.
- Standard business mileage rate. The IRS annually issues its standard business mileage rate, also called the safe harbor rate. The mileage reimbursement rate for 2018 is 54.5 cents for business miles driven, up from 53.5 cents in 2017. This rate—based on the nationwide average cost of operating a vehicle in the prior year—is intended to give taxpayers an easy way to write off their tax-deductible costs for unreimbursed driving expenses. The IRS, however, does not recommend it as a method of direct reimbursement.
For 2019, the standard business mileage rate is 58 cents per mile driven.
Car Allowances, FAVR or Standard Mileage Rate?
"In many cases, a car allowance program is administered due to its perceived ease of use," said Danielle Lackey, general counsel at Motus, a provider of mobile-workforce management software and fleet management programs. But while giving all workers a monthly stipend saves the time of calculating payments for each employee, "it can introduce unequal treatment within the workforce," since mobile workers incur a wide range of expenses as they drive, she noted. "These costs vary considerably over time and also vary based on the location of the mobile worker."
Another consideration is that flat car allowances can cost employers added FICA taxes and employees added income taxes. So "if you administer a flat car allowance of $400 to your employees, you're actually paying $430.60 and your employees are only taking home $269.40 each month after taxes—resulting in annual tax waste of $1,934.40 per employee," Lackey said.
"Unfortunately, gas prices cannot be forecast, and this unpredictable movement of fuel prices can negatively impact budget expense performance" with a flat car allowance, said John Domsy, vice president of CarData Consultants Inc., a provider of vehicle reimbursement programs.
However, car allowance programs "have their unique place as well," said Dillon Blake, senior director of business development at Motus. "Like any vehicle program, car allowances have benefits and challenges and, depending on the characteristics of your company, may be the right fit for you," such as if the company is reimbursing a handful of drivers who spend a similar amount of time on the road, he said.
While both FAVR and the standard-mileage rate programs provide tax-advantaged reimbursement for the employee if certain conditions are met, "fixed and variable is regarded as best-in-class because of the regional accuracy" when calculating actual costs, said Domsy. "The standard mileage rate is regarded as higher than actual expenses but fair when used on an occasional basis," he noted.
"FAVR is the most-accurate of the IRS-approved mileage reimbursement methods because it results in personalized mileage reimbursement rates based on each employee's costs to operate their car," Lackey said.
Because reimbursements through a FAVR program are based on specific vehicle usage costs, "tracking, processing and reimbursing accurately for these costs is not always easy," Lackey pointed out, given that many still rely on manual mileage reporting techniques, like handwritten paper logs or spreadsheets.
[SHRM members-only HR Q&A: Do we have to reimburse personal auto mileage for business-related trips?]
Automated software tools used in FAVR programs can help HR and payroll departments to account for fixed and variable driving costs, Lackey said. For instance, these programs can "automatically capture mileage in the field—and automatically populate IRS-compliant daily mileage logs—and monitor driving costs throughout the country to calculate and reimburse employees' actual costs," she explained. "Technology-driven data like this helps companies to treat their mobile workers equally by reimbursing actual expenses."
"However, it's important to choose the right technology," Blake said. "Some solutions provide less-intrusive models that allow drivers to submit their business mileage and odometer [reading], rather than capture every single trip and provide it to the business" through so-called telematics that track vehicle locations, he noted.
Telematics solutions may make more sense when managing service vehicles, such as trucks, vans or logoed vehicles, Blake said.
When selecting appropriate technology to manage reimbursement programs, "HR directors need to carefully consider their mileage reimbursement policies" and how employee-owned vehicles are being used, Lackey advised.
Examples of smartphone applications for tracking and logging business miles and other expenses include Microsoft's MileIQ, CarData's Mobile Interactive Route (Mi-Route), and the Motus mileage tracking app.
Related SHRM Article:
IRS Announces Higher Standard Mileage Rate for 2018, SHRM Online Benefits, January 2018